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Internet Sales Tax Coming Too Late for Some Stores

As I wrote in a few days ago, the Internet sales tax mandate is coming. It's stupid, and it will only benefit the larger retailers — especially Amazon because Amazon offers "retail services" to other businesses. Amazon Web Services, Amazon Merchant Services, and so forth, mean that Amazon will not only survive a tax mandate, but Amazon will thrive with Internet sales tax mandates.

Either politicians and business groups are stupid and/or naive, or they know perfectly well that Amazon and other larger retailers will do fine.

Anita Demetropoulos, a Maine shopkeeper, figured she would never see the day when her most relentless competitor, Amazon, would be forced to collect sales tax.

Now that Congress seems ready to do that, she is no longer sure it matters. Even in losing, the e-commerce powerhouse is triumphant. It no longer needs the tax break to vanquish its foes — and could even make money by collecting the new taxes for other retailers.

"I'm surprised and glad this is happening," said Ms. Demetropoulos, who owns three toy stores with her husband. "But Amazon won't rest until it gobbles up everyone and everything."

The Senate is poised to pass a bill to require all but the smallest online sellers to collect the tax. The House appears likely to follow suit. Although Amazon's desire to avoid the tax played a fundamental role in its founding and growth, it is a supporter of the legislation.

Demetropoulos is mistaken to consider this more fair — and she should not be glad the Senate is considering sales tax collection mandates. "Hurting" other retailers to help yours is more about envy than about good law. This is like the people cheering higher taxes on the rich, simply because they dislike the rich.

Amazon does not complete on price differences of a few pennies. If I can buy a book locally for the same price or "close enough" price, I will. Amazon, however, is often much, much cheaper. More importantly, most items I order online aren't even in stock at local stores. Amazon competes on selection and convenience, at least as much as price. And when it wins on price, it wins by a lot. (Much like Walmart does. My wife and I buy household items at Walmart because it is significantly cheaper than other retailers.)

Consider the experience of Amazon in states where it already collects taxes.

Analysts who closely follow the fortunes of Amazon say collecting taxes is unlikely to drive away its customers. They say it may even help the Seattle company while simultaneously defusing a potent political issue.

In the few states where the company has already begun collecting, said Gene Munster, an analyst with Piper Jaffray, sales dip for about a year. "Then the customers come back for the convenience and selection," he said.

My wife and I are clearly not an isolated example of why people shop for books, music, and electronics items online. I shop with Amazon, Newegg, Other World Computing, and B&H Photo on a regular basis. I also use the Apple stores, both for physical items and digital downloads. There's no Apple retailer in our county.

Retailers need to stop obsessing about the few cents-per-dollar of a sales tax mandate. Focus on carrying items, in stock and for a "good enough" price with excellent service.

Amazon isn't afraid of online taxes. That's a simply computer database problem for a company the size of Amazon — or Walmart, or Apple, or any other major retailer. But, for a small online and physical retailer, this is going to be a nightmare. I previously wrote of the nearly 10,000 (you read that right) sales tax jurisdictions in the United States. Good luck, Main Street. Small retailers will end up contracting with Amazon to process transactions. The irony in "punishing Amazon" is that it will reward Amazon — at the expense of mid-size retailers.

Figuring out the tax in thousands of jurisdictions could be a logistical nightmare for merchants just above the legislation's threshold of $1 million in annual revenue. That is another place where Amazon is expected to benefit; it could sell tax collection services to tens of thousands of third parties.

[…]

In recent years, states struggling in the recession became more aggressive toward Amazon. Texas, New York and California all pursued the company over the tax issue. Amazon began making deals to collect the tax while simultaneously building warehouses that would bring it closer to its customers, bringing same-day delivery within reach.

Forcing Amazon to collect taxes didn't hurt Amazon in these large states. Increase prices a few pennies, add the "Amazon Prime" program that charges customers for special delivery options, and the company was fine. If anything, Amazon turned out the big winner in these tax "surrenders" to various states.

Amazon knows this well enough that it actually supports the sales tax mandate. It resisted in the past, but has learned to capitalize on its technical prowess.

Last August, an Amazon executive testified before Congress that all "sellers should compete on a level playing field" and that the states really needed the tax money, which was estimated to be more than $10 billion annually. When the Senate introduced the legislation in February, Amazon wrote to the sponsoring senators to thank them.

Thomas J. Szkutak, Amazon's chief financial officer, dismissed any ill effect from legislation, telling reporters this week that "certainly we'll continue to have a good business in those states."

A few retailers recognize the scam that is the Internet sales tax mandate.

"This is all about the big Internet companies — Amazon, Walmart — crushing the small companies," said Chris Chapman, who sells winter sports equipment on eBay, Amazon and through his own Web site, SnowSportDeals.com.

His sales are slightly over the threshold. That means Mr. Chapman, who is based in Maryland, will either have to spend many hours figuring out how to collect taxes himself or pay someone to do it for him.

"This will make it harder for people like me to start a Web business," Mr. Chapman said.

"So Amazon will just get more customers. It's win-win for them."

As I posted recently, neighboring states don't have to charge my wife and me the Pennsylvania, Beaver County, Beaver Falls sales tax when we make a purchase. We don't pay Beaver Falls sales taxes in nearby counties, either (actually, those counties have higher tax rates).

If we want a simple tax policy for online retailers, make them collect the sales taxes applicable to their physical locations — period. A retailer in Ohio would charge every customer — physical or online — the same sales tax rate. That would be logical. Tourists in New York City pay New York sales taxes, no matter from where the tourists originated. Would NYC like to change that policy? I doubt it.

If retailers have to collect tax, therefore, let it be the local tax. Simple, one rate, no special database or software programming required. It isn't ideal, but it is closer to "fair" than trying to process collections and payments to 10,000 tax jurisdictions.

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